Chapter 4

Descriptive
Statistical Measures
Populations and Samples

Population - all items of interest for a particular

decision or investigation
- all married drivers over 25 years old
- all subscribers to Netflix
Sample - a subset of the population
- a list of individuals who rented a comedy from
Netflix in the past year
The purpose of sampling is to obtain sufficient
information to draw a valid inference about a
population.
Understanding Statistical Notation
We typically label the elements of a data set using
subscripted variables, x1, x2 , … , and so on, where xi
represents the ith observation.
It is common practice in statistics to use Greek letters,
such as μ (mu), σ (sigma), and π (pi), to represent
population measures and italic letters such as by x
(called x-bar), s, and p to represent sample statistics.
N represents the number of items in a population and n
represents the number of observations in a sample.
Σ represents summation: Σxi = x1 + x2 + … xn
Measures of Location: Arithmetic Mean

Population mean:

Sample mean:

Excel function: =AVERAGE(data range)

Property of the mean:

Outliers can affect the value of the mean.

Example 4.1: Computing Mean Cost per
Order
Purchase Orders database
Using formula:

=SUM(B2:B95)/COUNT(B2:B95)

Mean = $2,471,760/94
= $26,295.32

Using Excel AVERAGE Function

=AVERAGE(B2:B95)
Measures of Location: Median
The median specifies the middle value when the data are
arranged from least to greatest.
◦ Half the data are below the median, and half the data are above
it.
◦ For an odd number of observations, the median is the middle of
the sorted numbers.
◦ For an even number of observations, the median is the mean of
the two middle numbers.
We could use the Sort option in Excel to rank-order the data
and then determine the median. The Excel function
=MEDIAN(data range) could also be used.
The median is meaningful for ratio, interval, and ordinal data.
Not affected by outliers.
Example 4.2: Finding the Median Cost per
Order
Sort the data from smallest to largest. Since we
have 90 observations, the median is the average
of the 47th and 48th observation.

Median =
($15,562.50 + $15,750.00)/2
= $15,656.25

=MEDIAN(B2:B94)
Measures of Location: Mode
The mode is the observation that occurs most
frequently.
The mode is most useful for data sets that contain
a relatively small number of unique values.
You can easily identify the mode from a frequency
distribution by identifying the value or group
having the largest frequency or from a histogram
by identifying the highest bar.
Excel function: =MODE.SNGL(data range).
For multiple modes: =MODE.MULT(data range)
Example 4.3: Finding the Mode
Purchase Orders
database: A/P Terms
Mode = 30 months

Cost per order

Mode is the group
between $0 and
$13,000
Measures of Location: Midrange

The midrange is the average of the greatest and

least values in the data set.
Caution must be exercised when using the
midrange because extreme values easily distort
the result. This is because the midrange uses only
two pieces of data, whereas the mean uses all
the data; thus, it is usually a much rougher
estimate than the mean and is often used for only
small sample sizes.
Example 4.4: Computing the Midrange

Purchase Orders data

Use the Excel MIN and MAX functions or sort the
data and find them easily.
Cost per order midrange:
= ($68.78 + $127,500)/2
= $63,784.89
Using Measures of Location – Example
4.5: Quoting Computer Repair Times
The Excel file Computer Repair Times includes 250
repair times for customers.
What repair time would be
reasonable to quote to a
new customer?
Median repair time is 2
weeks; mean and mode are
about 15 days.
Examine the histogram.
Example 4.5 (continued)

90% are completed within 3 weeks

Measures of Dispersion

Dispersion refers to the degree of variation in

the data; that is, the numerical spread (or
compactness) of the data.
Key measures:
◦ Range
◦ Interquartile range
◦ Variance
◦ Standard deviation
Measures of Dispersion: Range
The range is the simplest and is the difference
between the maximum value and the minimum
value in the data set.
In Excel, compute as =MAX(data range) -
MIN(data range).
The range is affected by outliers, and is often used
only for very small data sets.
Example 4.6: Computing the Range

Purchase Orders data

For the cost per order data:
◦ Maximum = $127,500
◦ Minimum = $68.78
Range = $127,500 - $68.78 = $127,431.22
Measures of Dispersion:
Interquartile Range
The interquartile range (IQR), or the midspread
is the difference between the first and third
quartiles, Q3 – Q1.
This includes only the middle 50% of the data and,
therefore, is not influenced by extreme values.
Example 4.7: Computing the Interquartile
Range

Purchase Orders data

For the Cost per order data:
Third Quartile = Q3 = $27,593.75
First Quartile = Q1 = $6,757.81
Interquartile Range = $27,593.75 – $6,757.81
=$20,835.94
Measures of Dispersion: Variance

The variance is the “average” of the squared

deviations from the mean.
For a population:

◦ In Excel: =VAR.P(data range)

For a sample:

◦ In Excel: =VAR.S(data range)

Note the difference in denominators!
Example 4.8 Computing the Variance
Purchase Orders Cost per order data
Measures of Dispersion: Standard
Deviation
The standard deviation is the square root of the
variance.
◦ Note that the dimension of the variance is the square of the
dimension of the observations, whereas the dimension of the
standard deviation is the same as the data. This makes the
standard deviation more practical to use in applications.
For a population:

◦ In Excel: =STDEV.P(data range)

For a sample:

◦ In Excel: =STDEV.S(data range)

Example 4.9 Computing the Standard
Deviation
Purchase Orders Cost per order data

Using the results of Example 4.8, take the square

root of the variance:

Alternatively, use the STDEV.S function for the

data range.
Standard Deviation as a Measure of Risk
Excel file: Closing Stock
Prices
Intel (INTC):
Mean = $18.81
Standard deviation = $0.50
General Electric (GE):
Mean = $16.19
Standard deviation = $0.35

INTC is a higher risk

investment than GE.
Chebyshev’s Theorem
For any data set, the proportion of values that lie
within k (k > 1) standard deviations of the mean
is at least 1 – 1/k2
Examples:
◦ For k = 2: at least ¾ or 75% of the data lie within two
standard deviations of the mean
◦ For k = 3: at least 8/9 or 89% of the data lie within three
standard deviations of the mean
Empirical Rules
For many data sets encountered in practice:
Approximately 68% of the observations fall within one
standard deviation of the mean
Approximately 95% fall within two standard deviations of
the mean
Approximately 99.7% fall within three standard deviations
of the mean
These rules are commonly used to characterize
the natural variation in manufacturing processes
and other business phenomena.
Process Capability Index

The process capability index (Cp) is a measure of

how well a manufacturing process can achieve
specifications.
Using a sample of output, measure the dimension
of interest, and compute the total variation using
the third empirical rule.
Compare results to specifications using:
Example 4.11 Using Empirical Rules to
Measure the Capability of a Manufacturing
Process

Empirical rules
Standardized Values
A standardized value, commonly called a z-score,
provides a relative measure of the distance an
observation is from the mean, which is independent of
the units of measurement.
The z-score for the ith observation in a data set is
calculated as follows:

◦ Excel function: =STANDARDIZE(x, mean, standard_dev).

Properties of z-Scores
The numerator represents the distance that xi is from the
sample mean; a negative value indicates that xi lies to
the left of the mean, and a positive value indicates that it
lies to the right of the mean. By dividing by the standard
deviation, s, we scale the distance from the mean to
express it in units of standard deviations. Thus,
◦ a z-score of 1.0 means that the observation is one standard
deviation to the right of the mean;
◦ a z-score of 2 1.5 means that the observation is 1.5 standard
deviations to the left of the mean.
Example 4.12 Computing z-Scores
Purchase Orders Cost per order data

=(B2 - $B$97)/$B$98, or
=STANDARDIZE(B2,$B$97,$B$98).
Coefficient of Variation

The coefficient of variation (CV) provides a relative

measure of dispersion in data relative to the mean:

Sometimes expressed as a percentage.

Provides a relative measure of risk to return.
Return to risk = 1/CV, is often easier to interpret,
especially in financial risk analysis.
The Sharpe ratio is a related measure in finance.
Example 4.13 Applying the Coefficient of
Variation
Closing Stock Prices worksheet
Intel (INTC) is slightly riskier than the other stocks.
The Index fund has the least risk (lowest CV).
Measures of Shape: Skewness
Skewness describes the lack of symmetry of
data.
◦ Distributions that tail off to the right are called positively
skewed; those that tail off to the left are said to be
negatively skewed.

Positively skewed Symmetrical

Coefficient of Skewness
Coefficient of Skewness (CS):

Excel function: =SKEW(data range)

CS is negative for left-skewed data.
CS is positive for right-skewed data.
|CS| > 1 suggests high degree of skewness.
0.5 ≤ |CS| ≤ 1 suggests moderate skewness.
|CS| < 0.5 suggests relative symmetry.
Example 4.14: Measuring Skewness

Purchase Orders database

Cost per order data: CS = 1.66 (high positive
skewness)
A/P terms data: CS = 0.60 (moderate positive
skewness)
Measures of Shape: Kurtosis
Kurtosis refers to the peakedness (i.e., high, narrow) or
flatness (i.e., short, flat-topped) of a histogram.
The coefficient of kurtosis (CK) measures the degree of
kurtosis of a population

CK < 3 indicates the data is somewhat flat with a wide degree of

dispersion.
CK > 3 indicates the data is somewhat peaked with less
dispersion.
Excel function: =KURT(data range).
Shape and Measures of Location
Comparing measures of location can sometimes reveal
information about the shape of the distribution of
observations.
◦ For example, if the distribution were perfectly symmetrical and
unimodal, the mean, median, and mode would all be the same.
◦ If it were negatively skewed, we would generally find that
mean < median < mode
◦ Positive skewness would suggest that mode < median < mean
Excel Descriptive Statistics Tool
This tool provides a summary of numerical statistical measures
for sample data.

Data >
Data Analysis >
Descriptive Statistics
Enter Input Range
Labels (optional)
Check Summary Statistics box

The data must be in a single row or column. If the data are in

multiple columns, the tool treats each row or column as a
separate data set
Example 4.15: Using the Descriptive
Statistics Tool
Purchase Orders database

Note: Results of
the Analysis
Toolpak do not
change when
changes are
made to the data.
Descriptive Statistics for Grouped Data

Population mean:

Sample mean:

Population variance:

Sample variance:
Example 4.16: Computing Statistical
Measures from Frequency Distributions
Computer Repair Times
Grouped Data
If the data are grouped into k cells in a frequency
distribution, we can use modified versions of the
formulas to estimate the mean and variance by
replacing xi with a representative value (such as
the midpoint) for all the observations in each cell.
Example 4.17: Computing Descriptive Statistics
for a Grouped Frequency Distribution

Representative
group value
Descriptive Statistics for Categorical
Data: The Proportion
The proportion, denoted by p, is the fraction of
data that have a certain characteristic.
Proportions are key descriptive statistics for
categorical data, such as defects or errors in
quality control applications or consumer
preferences in market research.
Example 4.18: Computing a Proportion

Proportion of orders placed by Spacetime Technologies

=COUNTIF(A4:A97, “Spacetime Technologies”)/94
= 12/94 = 0.128
Statistics in PivotTables
Value Field Settings include several statistical
measures:
Average
Max and Min
Product
Standard deviation
Variance
Example 4.19: Statistical Measures in
PivotTables
Credit Risk Data
First, create a PivotTable.
In the PivotTable Field List, move Job to the Row Labels
field and Checking and Savings to the Values field. Then
change the field settings from “Sum of Checking” and
“Sum of Savings” to the averages.
Measures of Association
Two variables have a strong statistical relationship
with one another if they appear to move together.
When two variables appear to be related, you
might suspect a cause-and-effect relationship.
Sometimes, however, statistical relationships exist
even though a change in one variable is not
caused by a change in the other.
Measures of Association: Covariance
Covariance is a measure of the linear association between two
variables, X and Y. Like the variance, different formulas are used for
populations and samples.
Population covariance:

◦ Excel function: =COVARIANCE.P(array1,array2)

Sample covariance:

◦ Excel function: =COVARIANCE.S(array1,array2)

The covariance between X and Y is the average of the product of
the deviations of each pair of observations from their respective
means.
Example 4.20: Computing the Covariance
Colleges and
Universities data
Measures of Association:
Correlation
Correlation is a measure of the linear relationship between two
variables, X and Y, which does not depend on the units of
measurement.
Correlation is measured by the correlation coefficient, also known as
the Pearson product moment correlation coefficient.
Correlation coefficient for a population:

Correlation coefficient for a sample:

The correlation coefficient is scaled between -1 and 1.

Excel function: =CORREL(array1,array2)
Examples of Correlation
Example 4.21 Computing the Correlation
Coefficient
Colleges and Universities data
Notes on the CORREL Function
When using the CORREL function, it does not
matter if the data represent samples or
populations. In other words,

CORREL(array1,array2) =
COVARIANCE.P(array1,array2) / STDEV.P(array1)*STDEV.P(array2)

and

CORREL(array1,array2) =
COVARIANCE.S(array1,array2) / STDEV.S(array1)*STDEV.S(array2)
Excel Correlation Tool

Data >
Data Analysis >
Correlation

Excel computes the correlation coefficient

between all pairs of variables in the Input Range.
Input Range data must be in contiguous columns.
Example 4.22: Using the Correlation Tool
Colleges and Universities data

◦ Moderate negative correlation between acceptance rate and

graduation rate, indicating that schools with lower acceptance
rates have higher graduation rates.
◦ Acceptance rate is also negatively correlated with the median
SAT and Top 10% HS, suggesting that schools with lower
acceptance rates have higher student profiles.
◦ The correlations with Expenditures/Student suggest that schools
with higher student profiles spend more money per student.
Identifying Outliers

There is no standard definition of what constitutes

an outlier.
Some typical rules of thumb:
z-scores greater than +3 or less than -3
Extreme outliers are more than 3*IQR to the left of Q1 or
right of Q3
Mild outliers are between 1.5*IQR and 3*IQR to the left of
Q1 or right of Q3
Example 4.23: Investigating Outliers
Home Market Value data

None of the z-scores exceed 3. However, while

individual variables might not exhibit outliers,
combinations of them might.
◦ The last observation has a high market value ($120,700) but
a relatively small house size (1,581 square feet) and may be
an outlier.
Statistical Thinking in Business Decisions

Statistical Thinking is a philosophy of learning and

action for improvement, based on principles that:
all work occurs in a system of interconnected processes
variation exists in all processes
better performance results from understanding and reducing
variation
Work gets done in any organization through processes
— systematic ways of doing things that achieve desired
results.
Understanding business processes provides the context
for determining the effects of variation and the proper
type of action to be taken.
Example 4.24: Applying Statistical Thinking

Excel file Surgery Infections

◦ Is month 12 simply random variation or some explainable
phenomenon?
Example 4.24 Continued

Three-standard deviation empirical rule:

This suggests that month 12 is statistically

different from the rest of the data.
Variability in Samples
Different samples from any population will vary.
◦ They will have different means, standard deviations, and
other statistical measures
◦ They will have differences in the shapes of histograms.
Samples are extremely sensitive to the sample
size – the number of observations included in the
samples.
Example 4.25: Variation in Sample Data
Samples from Computer Repair Times data
Population statistics: μ = 14.91 days, σ2 = 35.5 days2
Two samples of size 50:

Two samples of size 25: